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Three Finance Questions on Risk

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7-2) The following table shows the nominal returns on U. S. stocks and the rate of inflation. a. What was the standard deviation of the market returns? b. Calculate the average real return. Year Nominal Return (%) Inflation (%) 2004 12.5 3.3 2005 6.4 3.4 2006 15.8 2.5 2007 5.6 4.1 2008 37.2 0.1

7-10) Here are inflation rates and U. S. stock market and Treasury bill returns between 1929 and 1933: Year Inflation Stock Market Return T- Bill Return 1929 .2 14.5 4.8 1930 6.0 28.3 2.4 1931 9.5 43.9 1.1 1932 10.3 9.9 1.0 1933 .5 57.3 .3 a. What was the real return on the stock market in each year? b. What was the average real return? c. What was the risk premium in each year? d. What was the average risk premium? e. What was the standard deviation of the risk premium?

7-14) Hyacinth Macaw invests 60% of her funds in stock I and the balance in stock J. The stan-dard deviation of returns on I is 10%, and on J it is 20%. Calculate the variance of portfolio returns, assuming a. The correlation between the returns is 1.0. b. The correlation is .5. c. The correlation is 0.